Tax Fraud or Tax Evasion – Amending Assessments Beyond 4 Years Limitation Period

Tax Fraud or Tax Evasion – Amending Assessments Beyond 4 Years Limitation Period

Tax Fraud or Tax Evasion – The Commissioner of Taxation may amend an assessment at any time if there has been tax fraud or tax evasion

Generally, the Commissioner is only permitted to review a Notice of Assessment within 2 to 4 years from when it was first issued under section 170 of the Income Tax Assessment Act 1936 (Cth). The 2 year limitation period applies for most individuals and small business entities whereas the 4 year limitation period applies to taxpayers with complex tax affairs and large business taxpayers. However, the Commissioner has the power to amend a Notice of Assessment at any time in the event of tax fraud or tax evasion regardless of the 2 year or 4 year limitation periods.

On 24 December 2013, the Administrative Appeals Tribunal (AAT) in PNGR and VFYF v Commissioner of Taxation [2013] AATA 942 affirmed the Commissioner’s decision to amend each partner’s original assessments beyond the 4 year limit period because the Commissioner determined there was tax fraud or tax evasion.

The case involved a partnership of husband and wife who conducted several businesses over time. Specifically, the partnership carried on a small mixed business which was located adjacent to the premises from which the partnership also carried on a tobacco supply business. Even though the partnership maintained separate bank accounts, the income derived from each business was intermingled thereby making it difficult for the Commissioner to trace the financial affairs of the partnership.

For several income years, the partnership had significant total business income (greater than $2 million) but the expenses accounted for approximately 98% of the partnership income. Accordingly, the net income from the partnership was distributed equally to each partner who then reported their share of the partnership income in their respective tax returns ranging from $26,975 to $60,210. Significantly, the Commissioner of Tax required the partners to demonstrate how they acquired a substantial property portfolio of approximately $3.6 million when they were only reporting relatively modest incomes but also had significant financial and personal expenses (eg mortgage repayments and living expenses etc).

Firstly, the partners contended that the Commissioner was not allowed to amend the assessments more than four years after the date of the original assessments because they had not engaged in tax fraud or tax evasion in their dealings with the Commissioner. The partners gave evidence that they used several sources of money to acquire the substantial property portfolio including cash on hand, monies borrowed from banks, family members and friends as well as their participation in Huis, being a traditional way of raising money in the Vietnamese business community. The AAT agreed with the Commissioner that based on the “scale of the underreporting” he could infer that the partners engaged in tax fraud or tax evasion. Relevantly, the AAT stated:

75. I am satisfied the applicants must have engaged in fraud or evasion in their dealings with the Commissioner. They did not misinform the Commissioner about their taxable income through accident or oversight. I am satisfied they actively and deliberately misinformed the Commissioner about their income. Mr H was clearly involved in the affairs of the business after he fell ill, even though he was not active in day-to-day operations. He cannot avoid responsibility for what was said in the later years in the period. Mrs W, while less involved early on, was still present in the business and able to observe what was going on. Once her husband fell ill, she actively ran the business and dealt with the accountant, so she must have been aware the returns furnished by the accountant were misleading.”

The AAT therefore held that the Commissioner was allowed to amend the assessments more than four years after the date of the original assessments because the partners had engaged in tax fraud or tax evasion.

Secondly, the partners contended that the amended assessments were excessive based on the circumstances of the case. The AAT called into question the value of the husband’s oral evidence because he had difficulties understanding questions and remembering specific events as a likely result of the husband’s age, state of health, and language barriers. The AAT also said that the wife’s evidence was of limited value given her lack of knowledge of running the partnership business and she left the business decisions to her husband.

The AAT explained that the partners had the burden of proving that the amended assessments were excessive or incorrect and what the assessment should have been (eg identify what the correct amounts that should be assessed) under paragraph 14ZZK(b) of the Taxation Administration Act 1953 (Cth). The AAT held that the partners failed to discharge their obligations of proving that the amended assessments were excessive.

Furthermore, the AAT also held that the partners did not demonstrate that the administrative penalties imposed on the tax shortfalls in each income year that resulted from the misleading statements in the respective tax returns were excessive or that there was any basis for remitting the penalties based on the circumstances.

Consequently, the partners were liable for the following administrative penalties for each income year being:

  1. a base penalty amount of 75% of the partners shortfall amount as a result of intentional disregard of the law and
  2. an increase in base penalty amount by 20% because there was a base penalty amount for the same penalty type previously.

Vintage Lawyers Words of Wisdom Regarding Tax Fraud or Tax Evasion

  1. The Commissioner may amend your original assessment at any time where the Commissioner forms the view that there has been tax fraud or tax evasion
  2. Base penalties of up to 75% may also apply for false or misleading statements which result in shortfall amounts from intentional disregard of a taxation law by you or your agent as well as an uplift of 20% for each subsequent tax shortfall amounts
  3. General Interest Charge will also apply to any tax shortfalls
  4. Consider making a voluntary disclosure to the Australian Taxation Office concerning your tax fraud or tax evasion arrangement(s) because reductions in base penalty may be available
  5. If you engage in tax fraud or tax evasion, you may have committed a criminal offence
  6. If you are uncertain on how a tax law applies, or would apply, to you in relation to a specified tax fraud or tax evasion scheme or your circumstances, apply for a private binding ruling
  7. Getting involved in any tax fraud or tax evasion arrangements can be very costly and extremely stressful when you get caught, so ask yourself, is it really worth it?
  8. Phone Vintage Lawyers on (02) 9251 1108 or email if you need any tax assistance.

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